Samenvatting International Economics
What is international economics?
• International economics studies:
- the economic interactions among the different nations that make up the global economy;
- how inhabitants of different nations interact through the flow of trade in goods and services and the flow of
money and investment.
• Empirically:
- nations are more closely linked through trade and financial transactions than ever before;
- smaller countries are likely to be more open
Internationale economie bestaat uit:
1. International Finance / Open Economy Macroeconomics / International Monetary Economics - - > (eerste 3,5
weken)
2. International Trade / Microeconomics - - > (laatste 3,5 weken)
Lecture 1: Set-up of the Course and Balance of Payments
- National income, current account, investment and savings
• GNP and GDP
• Link between current account and changes in net foreign assets
• Link between current account and national savings and investment
- Balance of payments (accounts and accounting principles)
• The main accounts
• The principle of double accounting
• How can we have a Balance of Payments deficit or surplus?
NOTE: we are all Americans
National Income Accounts: GNP → wat er door dat land wordt geproduceerd in home en abroad
• Gross national product (GNP) is the value of all final goods and services produced by a
nation’s factors of production in a given time period.
- What are factors of production?
Factors that are used to produce goods and services:
– workers (labor services),
– physical capital (like buildings and equipment),
– land (estate, farmland), natural resources (rare earths, minerals) and others.
- The value of final goods and services produced by home-owned factors of production
are counted as home country’s GNP.
National Income Accounts: GDP → wat er in dat land wordt geproduceerd door home en foreign
Another approximate measure of national income:
• Gross domestic product (GDP) measures the final value of all goods and services that are
produced within a country in a given time period.
Van GNP naar GDP
GNP GDP
Where is it produced? Where is it produced?
Home Abroad
Who owns the factors
of production that are Home owned BIG -
used to produce it?
Who owns the factors
of production that are Foreign owned + BIG
used to produce it?
,In tekst - - - >
GNP – wat er in het buitenland wordt geproduceerd door home owners + wat in home
geproduceerd wordt door het buitenland
• GDP = GNP [produced by a country’s factors of prod.]
– payments (from foreign countries) for home factors of
production, but produced abroad
(e.g. domestic capital invested abroad)
+ payments (to foreign countries) for foreign factors of
production, but produced at home
(e.g. foreign capital invested in the NL)
National Income Accounts: GNP (conts.)
• GNP is calculated by adding the value of expenditure on final goods and services produced.
• There are 4 types of expenditure (who’s spending money):
1. Consumption: expenditure by domestic consumers
2. Investment: expenditure by firms on buildings & equipment
3. Government purchases: expenditure by governments on goods and services (usually
also referred to as government consumption, but it also includes government
investment, e.g. infrastructural investment)
4. Current account balance (“exports” minus “imports”): net expenditure by foreigners
on domestic goods and services including factor payments (incl. interest payments)
National income: two interpretations
Ex post national income identity:
➢ national income = Y = C + I + G + CA = expenditure on domestic production
➢ Final products not purchased by households or gov. are counted as inventory
investment by firms.
Equilibrium condition in a demand driven model: (not mentioned in book)
➢ Keynesian Cross
➢ Supply = dom. production
= Y = AD (aggregate demand)
= C + I + G + CA
(meaning Cdem + Idem + Gdem + EXdem - IMdem)
National income: other issues
Alternative representation of the national income identity:
➢ national inc./prod + imports = expenditures at home + abroad
(goods/services available in home country)
➢ Y + IM = C+I +G + EX
EX-IM has two meanings: (confusing in the book)
➢ In CA (here): Net expenditure by foreign individuals and institutions
→ this includes, for instance, interest payments for debt / foreign capital
➢ In trade balance: it means exports and imports of goods and services
,A nation’s net foreign assets
• CA = EX – IM = Y – (C + I + G )
• When production > domestic expenditure (= domestic absorption = expenditures by dom.
indiv./inst.),
then “exports” > “imports”: current account > 0 (CA surplus)
(and probably trade balance > 0):
When a country “exports” more than it “imports”,
it earns more income from “exports” than it spends on “imports”
→ Net foreign assets increase.
CA surplus “produces” net foreign wealth (investment)
• When production < domestic expenditure,
then “exports” < “imports”: current account < 0 (CA deficit)
→ Net foreign assets decrease.
Savings and the Current Account := betekent definitie
• National saving (S) := national income (Y) that is not spent on
consumption (C) or gov. purchases (G):
S := Y – C – G
= (Y – C – T) + (T – G)
=: Sprivate + Sgovernment [Sg is also the gov. budget]
• We already know: CA = EX – IM = Y – (C + I + G )
= (Y – C – G ) – I
= S – I
• Current account = national saving – investment
• Current account = change in net foreign assets = net foreign investment
• “IM> EX” (CA<0) S<I
Savings and the Current Account (cont.)
• CA = S – I or I = S – CA
• Countries can finance investment either by saving or by acquiring foreign funds equal to the
current account deficit:
A current account deficit implies a financial asset inflow (= negative net foreign investment).
• CA = Sp + Sg – I
= Sp + government budget – I
CA = (Sp – I) + (T – G)
• Twin deficit:
(<0) (=0) (<0)
A deficit in the budget corresponds to/implies a curr. account deficit, if the private sector does not
increase savings.
Savings and the Current Account (cont.) SUMMARY
(Sp – I) + (T – G) = (X – M)
private public external
savings + (gov. budget) = (current account)
surplus surplus surplus
• Note: this is an ex post identity → there is no direct causality:
e.g. for solving the twin deficit problem: (T – G) < 0 and (X – M) < 0:
it does not necessarily work to reduce imports in order to solve the budget problem
, Balance of payments (BoP): the shortest ever summary
• Definition: flow of all payments for transactions conducted between home country and RoW
(rest of the world).
• (CA + KA = ERR) ERR= errors [before 2000]
CA (+ capital acc.) + financial acc. = ERR [new IMF standard]
• BoP balanced by definition, but ERR (which should be 0)
Each international transaction enters the accounts twice:
once as a credit item (+) and once as a debit item (-)
• But loosely speaking:
- “BoP deficit” ≡ deficit official settlements balance (= surplus in reserve portion of FA)
= losing international reserves
- “Imports > exports” = current account deficit
[ = “BoP deficit” if private investment in financial accounts more or less balanced]
Balance of payments versus a balance sheet
• A firm’s balance sheet:
- Provides information on the firm’s assets, liabilities and thus its net worth at a particular point in time.
- The balance sheets of two subsequent years provide information on the changes in value of the firm’s
assets, liabilities & net worth.
- Profit and loss account reports profits and losses from the firm’s activities / changes in net worth
resulting from changes in assets, liabilities.
• A country’s balance of payments:
- Provides information on a country’s profit and loss account (current account) and the resulting change
in a country’s net worth (i.e. private net foreign wealth and public reserves).
Balance of payments account
• A country’s balance of payments accounts for its payments to and its receipts from
foreigners during a certain period.
• An international transaction involves two parties, and each transaction enters the accounts
twice: once as a credit (+) and once as a debit (-).
• Due to the double entry of each transaction, the balance of payments accounts will balance
by the following equation:
current account + financial account + capital account = 0
What is international economics?
• International economics studies:
- the economic interactions among the different nations that make up the global economy;
- how inhabitants of different nations interact through the flow of trade in goods and services and the flow of
money and investment.
• Empirically:
- nations are more closely linked through trade and financial transactions than ever before;
- smaller countries are likely to be more open
Internationale economie bestaat uit:
1. International Finance / Open Economy Macroeconomics / International Monetary Economics - - > (eerste 3,5
weken)
2. International Trade / Microeconomics - - > (laatste 3,5 weken)
Lecture 1: Set-up of the Course and Balance of Payments
- National income, current account, investment and savings
• GNP and GDP
• Link between current account and changes in net foreign assets
• Link between current account and national savings and investment
- Balance of payments (accounts and accounting principles)
• The main accounts
• The principle of double accounting
• How can we have a Balance of Payments deficit or surplus?
NOTE: we are all Americans
National Income Accounts: GNP → wat er door dat land wordt geproduceerd in home en abroad
• Gross national product (GNP) is the value of all final goods and services produced by a
nation’s factors of production in a given time period.
- What are factors of production?
Factors that are used to produce goods and services:
– workers (labor services),
– physical capital (like buildings and equipment),
– land (estate, farmland), natural resources (rare earths, minerals) and others.
- The value of final goods and services produced by home-owned factors of production
are counted as home country’s GNP.
National Income Accounts: GDP → wat er in dat land wordt geproduceerd door home en foreign
Another approximate measure of national income:
• Gross domestic product (GDP) measures the final value of all goods and services that are
produced within a country in a given time period.
Van GNP naar GDP
GNP GDP
Where is it produced? Where is it produced?
Home Abroad
Who owns the factors
of production that are Home owned BIG -
used to produce it?
Who owns the factors
of production that are Foreign owned + BIG
used to produce it?
,In tekst - - - >
GNP – wat er in het buitenland wordt geproduceerd door home owners + wat in home
geproduceerd wordt door het buitenland
• GDP = GNP [produced by a country’s factors of prod.]
– payments (from foreign countries) for home factors of
production, but produced abroad
(e.g. domestic capital invested abroad)
+ payments (to foreign countries) for foreign factors of
production, but produced at home
(e.g. foreign capital invested in the NL)
National Income Accounts: GNP (conts.)
• GNP is calculated by adding the value of expenditure on final goods and services produced.
• There are 4 types of expenditure (who’s spending money):
1. Consumption: expenditure by domestic consumers
2. Investment: expenditure by firms on buildings & equipment
3. Government purchases: expenditure by governments on goods and services (usually
also referred to as government consumption, but it also includes government
investment, e.g. infrastructural investment)
4. Current account balance (“exports” minus “imports”): net expenditure by foreigners
on domestic goods and services including factor payments (incl. interest payments)
National income: two interpretations
Ex post national income identity:
➢ national income = Y = C + I + G + CA = expenditure on domestic production
➢ Final products not purchased by households or gov. are counted as inventory
investment by firms.
Equilibrium condition in a demand driven model: (not mentioned in book)
➢ Keynesian Cross
➢ Supply = dom. production
= Y = AD (aggregate demand)
= C + I + G + CA
(meaning Cdem + Idem + Gdem + EXdem - IMdem)
National income: other issues
Alternative representation of the national income identity:
➢ national inc./prod + imports = expenditures at home + abroad
(goods/services available in home country)
➢ Y + IM = C+I +G + EX
EX-IM has two meanings: (confusing in the book)
➢ In CA (here): Net expenditure by foreign individuals and institutions
→ this includes, for instance, interest payments for debt / foreign capital
➢ In trade balance: it means exports and imports of goods and services
,A nation’s net foreign assets
• CA = EX – IM = Y – (C + I + G )
• When production > domestic expenditure (= domestic absorption = expenditures by dom.
indiv./inst.),
then “exports” > “imports”: current account > 0 (CA surplus)
(and probably trade balance > 0):
When a country “exports” more than it “imports”,
it earns more income from “exports” than it spends on “imports”
→ Net foreign assets increase.
CA surplus “produces” net foreign wealth (investment)
• When production < domestic expenditure,
then “exports” < “imports”: current account < 0 (CA deficit)
→ Net foreign assets decrease.
Savings and the Current Account := betekent definitie
• National saving (S) := national income (Y) that is not spent on
consumption (C) or gov. purchases (G):
S := Y – C – G
= (Y – C – T) + (T – G)
=: Sprivate + Sgovernment [Sg is also the gov. budget]
• We already know: CA = EX – IM = Y – (C + I + G )
= (Y – C – G ) – I
= S – I
• Current account = national saving – investment
• Current account = change in net foreign assets = net foreign investment
• “IM> EX” (CA<0) S<I
Savings and the Current Account (cont.)
• CA = S – I or I = S – CA
• Countries can finance investment either by saving or by acquiring foreign funds equal to the
current account deficit:
A current account deficit implies a financial asset inflow (= negative net foreign investment).
• CA = Sp + Sg – I
= Sp + government budget – I
CA = (Sp – I) + (T – G)
• Twin deficit:
(<0) (=0) (<0)
A deficit in the budget corresponds to/implies a curr. account deficit, if the private sector does not
increase savings.
Savings and the Current Account (cont.) SUMMARY
(Sp – I) + (T – G) = (X – M)
private public external
savings + (gov. budget) = (current account)
surplus surplus surplus
• Note: this is an ex post identity → there is no direct causality:
e.g. for solving the twin deficit problem: (T – G) < 0 and (X – M) < 0:
it does not necessarily work to reduce imports in order to solve the budget problem
, Balance of payments (BoP): the shortest ever summary
• Definition: flow of all payments for transactions conducted between home country and RoW
(rest of the world).
• (CA + KA = ERR) ERR= errors [before 2000]
CA (+ capital acc.) + financial acc. = ERR [new IMF standard]
• BoP balanced by definition, but ERR (which should be 0)
Each international transaction enters the accounts twice:
once as a credit item (+) and once as a debit item (-)
• But loosely speaking:
- “BoP deficit” ≡ deficit official settlements balance (= surplus in reserve portion of FA)
= losing international reserves
- “Imports > exports” = current account deficit
[ = “BoP deficit” if private investment in financial accounts more or less balanced]
Balance of payments versus a balance sheet
• A firm’s balance sheet:
- Provides information on the firm’s assets, liabilities and thus its net worth at a particular point in time.
- The balance sheets of two subsequent years provide information on the changes in value of the firm’s
assets, liabilities & net worth.
- Profit and loss account reports profits and losses from the firm’s activities / changes in net worth
resulting from changes in assets, liabilities.
• A country’s balance of payments:
- Provides information on a country’s profit and loss account (current account) and the resulting change
in a country’s net worth (i.e. private net foreign wealth and public reserves).
Balance of payments account
• A country’s balance of payments accounts for its payments to and its receipts from
foreigners during a certain period.
• An international transaction involves two parties, and each transaction enters the accounts
twice: once as a credit (+) and once as a debit (-).
• Due to the double entry of each transaction, the balance of payments accounts will balance
by the following equation:
current account + financial account + capital account = 0
